Exports to buoy Canada's Economic Growth in 2014: RBC Economics

TORONTO, March 19, 2014  As the global
economy continues to recover, demand for Canada's exports will pick-up,
fuelling real GDP growth in the period ahead, according to the latest
Economic
and Financial Market Outlook
issued today by RBC Economics. RBC is forecasting real GDP growth of 2.5
per cent in 2014 and 2.7 per cent in 2015.

"For the last four years the household sector has been the
key driver of Canada's economic growth. We expect that to change in 2014
- as the global economy continues on its path to recovery, exports will
become increasingly central to Canada's growth story," said Craig
Wright, senior vice-president and chief economist, RBC. "Not only
will the drivers of growth change, but the pace of economic activity will
gather speed following two years of sub-potential increases."

RBC notes that this transition has already started to happen. Net international
trade contributed a relatively modest 0.3 percentage points to growth
in 2013, which represented the first positive contribution since 2001.

Export volumes stood 5.0 per cent below their pre-recession peak at the
end of 2013. A large part of this underperformance is attributable to
the subpar U.S. recovery, says RBC. Competitiveness issues also weighed
on growth; the relatively strong Canadian dollar during the post-recession
period was one of these factors.

"It is the changing fortunes of both the U.S. economy and the Canadian
dollar that will act as catalysts for stronger exports in the year ahead,"
added Wright.

The report notes that the sharp selling pressure on the Canadian dollar
that surfaced in late-October 2013 and subsequently picked up momentum,
stalled in February. RBC still anticipates a further depreciation in the
period ahead, though at a slower pace with weakness attributed to optimism
about the U.S. economy rather than any made-in-Canada factors. In fact,
RBC expects the loonie will trade at $0.87 U.S. at the end of 2014 and
$0.85 U.S. at year-end 2015.

"A weaker Canadian dollar enhances the competitiveness of Canadian
goods in the U.S. market - historically, a 10 per cent depreciation boosting
export volumes by 3.3 per cent in the following two years," explained
Wright.

The household sector is unlikely to be a significant factor in the strengthening
in the economy in 2014, RBC says, largely owing to a pause in the housing
market. Spending on goods and services is expected to accelerate relative
to the past couple of years rising by 2.5 per cent in 2014 and 2.3 per
cent in 2015. Historically low interest rates coupled with a well-functioning
financial system and persistent, but moderating, employment growth will
provide needed support.

The Outlook notes that market interest rates will continue to move higher
in 2014 led by increases in longer-dated yields. Fed tapering of its bond
buying program will exert upward pressure on treasury yields and Canadian
bond yields will move in sync, says RBC. Shorter-term yields in Canada
are also forecast to increase in 2014 as a strengthening in economic growth,
tightening labour market conditions and accelerating wage growth fuel
a steady, albeit slow, increase in inflation. This is expected to occur
despite the official overnight rate remaining unchanged at 1.00 per cent
through this year.

"As the downside risks to the inflation outlook dissolve, the Bank
of Canada is likely to re-establish a tightening policy bias over the
course of this year - we expect the first hike to the overnight rate in
the second quarter of 2015," said Wright.

RBC expects the majority of provincial economies in Canada to accelerate
their pace of growth in 2014. Alberta will stand atop the provincial growth
rankings, well ahead of Ontario, the only other province to grow at or
above the national rate. The remaining provinces will grow at varying
paces below the national average.